Apply Capital Market Theories
Series 65 · Flashcards
SERIES 65 · FLASHCARDS
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QUESTION
Using CAPM, find
β
\beta
β
if
R
f
=
2
%
R_f=2\%
R
f
=
2%
,
E
(
R
m
)
=
8
%
E(R_m)=8\%
E
(
R
m
)
=
8%
, and
E
(
R
i
)
=
11
%
E(R_i)=11\%
E
(
R
i
)
=
11%
.
QUESTION
State the two-asset portfolio variance formula using
w
1
,
w
2
,
σ
1
,
σ
2
w_1,w_2,\sigma_1,\sigma_2
w
1
,
w
2
,
σ
1
,
σ
2
, and
Cov
12
\text{Cov}_{12}
Cov
12
.
QUESTION
Which correlation value provides the greatest diversification benefit:
+
1
+1
+
1
,
0
0
0
, or
−
1
-1
−
1
?
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ANSWER
−
1
-1
−
1
. A correlation of
−
1
-1
−
1
indicates perfect negative movement, maximizing risk reduction when combining assets in a portfolio.
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